GST compensation sunset: Punjab, Goa, Chhattisgarh may face most revenue stress

With the sunset of the five-year assured compensation for States under the Goods and Services Tax (GST) regime from this month, Punjab, Goa and Chhattisgarh are likely to face the most revenue stress, as per a new working paper by the National Institute of Public Finance and Policy (NIPFP).

The paper, titled ‘Revenue Assessment of GST in India’ by NIPFP associate professor Sacchidananda Mukherjee, notes that revenue collections from the GST regime have fallen short of expectations for both the Centre and the States, but the former made up for this by raising non-shareable taxes and levying cesses on commodities such as petroleum products.

Also read: The status of GST compensation dues

“Our analysis shows that for majority of States the share of State GST collection [with GST compensation receipts] in Gross State Domestic Product [GSDP] do not show much increase during 2017-21 as compared to the share of revenue that is subsumed into the GST in GSDP during 2015-17,” Mr. Mukherjee concluded.

Comparison of revenue trends

Comparing revenue trends prior to GST’s implementation from July 2017 with those since then, the paper found that the share of GST revenues fell for Madhya Pradesh under the new tax regime, while Punjab recorded the largest increase in the share of revenues, followed by Maharashtra. The revenue compensation assured to States to join the GST framework has helped them cope up with GST shortfalls.

Also read: GST compensation due to States now totals ₹35,266 crore

“…In absence of revenue compensation, States may face revenue shock and it will impact State finances differently for different States. States where dependence on GST compensation (as measured by the share of GST compensation in SGST collection) as well as the share of SGST in own tax revenue are higher [e.g., Goa, Punjab and Chhattisgarh], they may face relatively higher revenue stress than other States,” the paper pointed out.

States seek extension

On Monday, the Finance Ministry informed Parliament that a few States have requested the Centre to extend the GST compensation period beyond June, 2022. Over a dozen States raised concerns about the sunset of compensation provisions at the recent GST Council meeting that concluded on June 29 in Chandigarh.

“Our analysis shows that in the face of shortfall in GST collection, the Union government raised “non-shareable taxes” and “Cesses on commodities” on excisable goods under the Union Excise Duty [UED] which helped to mitigate the revenue shortfall in GST. Three petroleum products [petrol/ gasoline, diesel, aviation turbine fuel], natural gas, crude petroleum and tobacco attract UED in the GST regime,” Mr. Mukherjee noted.

Also read: GST compensation cess levy extended till March 2026

“This shows that in a federal setup, taxation power to levy taxes helps the federal government to cope up with the revenue shortfall associated with big tax reform like GST. However, provincial governments may not either enjoy the power of taxation as like the federal government or may not exercise the power to levy new taxes or raise additional revenue, due to political reluctance,” the paper added.

The paper recommended that States must protect their consumption base to bolster GST revenues, along with broader efforts to ease compliance and rein in tax evaders.

“For example, States could rein in base erosion in GST due to tax-shopping (or cross-State purchases) due to the availability of better options in neighbouring States by facilitating investment in consumer retail infrastructure. Similarly, demands for goods and services may be enlarged by providing economic opportunities to a larger group of people by investing in public infrastructure,” it said.